Your Taxes

Through this column, I understood that the entire maturity proceeds or surrender value of Insurance policies are taxable if the annual premium exceeds 20 per cent or 10 per cent of the policy amount depending on the date of issue. Will these rules apply for the Pradhan Mantri Vaya Vandana Yojana scheme for senoir citizens also? In case the policy holder dies and the nominee receives the amount, will it be taxable in the nominees’ hands also?

M Palaniswamy

The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a pension scheme for senior citizens that is open for investment from May 2017. Eligible investors (senior citizens aged 60 years and above) can enrol in the scheme by paying a lumpsum purchase price.

The scheme entails pension, maturity and death benefit to the policy holders. Hence, the tax exemption under section 10 (10D) depending on the quantum of premium and date of issue of the policy is not applicable to PMVVY.

The pension will be taxable in the hands of the investor at the normal tax rates applicable for his/her income slab. Given that there is no tax benefit at investment stage and that pension is taxable, we understand that refund of the purchase price on maturity is mere return of the investor’s money back with no accretion and hence should not be included as taxable income.

We are aware that if premium paid is in excess of 20 per cent of capital sum insured, then TDS will be deducted on the entire receipt and not just the capital gain. My query is, how do we determine the amount of capital gain and the income portion? Is there any general rule to bifurcate this?

Nitin Kumar

Section 10(10D) of the Income Tax Act 1961 provides exemption to any sum received by a person under an insurance policy. However, such exemption is not available if the premium payable for any of the years during the term of the policy exceeds 20 per cent if the policy was issued after April 1, 2003 but before March 31, 2012 and 10 per cent for policies issued from April 1, 2012.

There are no provisions in the Act to consider proceeds from life insurance policy under the head “Capital Gains”. The entire sum received will be included as income under the head “Income from other sources” and will be taxable at normal slab rates applicable to the individual.